- USD/JPY extends its consolidating sideways move for the second day in a row on Tuesday.
- The divergence of monetary policies between the Fed and the Bank of Japan, along with risk appetite weighs on the yen and offers support to the pair.
- The modest weakness of the dollar prevents the bulls from opening new positions and limits the rises of the pair.
The pair USD/JPY has a hard time gaining significant traction and remains stuck in a tight trading range, around the psychological level of 135.00 during the European session on Tuesday. This price behavior, for the second consecutive day, marks a consolidation phase following the recent strong move higher that hit a 24-year high last week.
The increase in the interest rate differential between Japan and the US, together with the risk boost, weighed on the safe-haven Japanese yen and acted as a tailwind for the USD/JPY pair. It should be remembered that The Bank of Japan (BoJ) decided on Friday to leave its ultra-loose monetary policy setup unchanged and reiterated its guidance to keep borrowing costs at “current or lower” levels. The Japanese central bank has also pledged to target the 10-year yield towards 0%.
In contrast, last week the Federal Reserve made the biggest hike since 1994 and signaled a faster monetary policy tightening path to control rising inflation. Furthermore, the so-called Fed dot plot showed that the median projection for the fed funds rate at the end of the year rose to 3.4% from the 1.9% estimate in March and to 3.8% in 2023. This triggered a new rising US Treasury yields, which was seen as another supportive factor for the USD/JPY pair.
The backdrop favors the bulls, although modest US dollar weakness prevented the USD/JPY pair from rising significantly, at least for now. Even from a technical point of view, the USD/JPY pair, so far, has struggled to break above the 135.50-135.60 resistance zone. This makes it prudent to wait for strong follow-on buying before positioning for any further short-term bullish moves.
Market participants now await the US economic calendar, with the Existing Home Sales release later in the American session. This coupled with US bond yields could influence the dollar price dynamics and provide some momentum to the USD/JPY pair. Investors will follow signals from the broader market risk sentiment to take advantage of some short-term opportunities.
key levels
A sustained force beyond the zone of 135.50-135.60 would be seen as a new trigger for the bulls and would allow the USD/JPY pair to recover the level of 136.00 for the first time since 1998. The subsequent move higher has the potential to lift the pair towards the next relevant hurdle near 136.50.
On the other hand, the low of the previous day, around 134.50seems to defend the immediate fall ahead of the horizontal support of 134.30-134.20. This is closely followed by the round level of 134.00which if broken decisively could spark aggressive trading around the USD/JPY pair.
Source: Fx Street
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